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Johnson Controls and Tyco Unite: Leaving Autos in Rearview Mirror

Johnson Controls' transformation improves our moat trend outlook.


 Johnson Controls (JCI) merged with Tyco International on Sept. 2 and is expected to spin off its automotive seating business, Adient, to shareholders on Oct. 31. We have taken a fresh look at the impact of the Tyco merger and Adient divestiture. We believe these two transactions will result in a more profitable and consistent (that is, less cyclical) business, one with much less exposure to the volatility of the automotive original equipment manufacturer market and more exposure to higher-margin, recurring service revenue. We think Tyco's suite of security and fire-protection products and services complements Johnson Controls' Building Efficiency business, and the combination should drive synergies and enhanced market penetration. Given the new company's drastically reduced exposure to the automakers and the addition of the Tyco business, which benefits from customer switching costs and intangible assets, we will upgrade narrow-moat Johnson Controls' moat trend to stable from negative once the merger and spin-off are executed.

Johnson Controls' Transformation Continues: Merges With Tyco and Divests the Auto Business
Tyco is the leading worldwide provider of security, fire-protection, and life safety products and services, with 9% global market share. Approximately 60% of the company's revenue is generated from product sales, with the remaining 40% of sales from higher-margin services. After the Adient spin-off, legacy Johnson Controls will consist of the Building Efficiency segment and the Power Solutions segment. The Building Efficiency segment sells HVAC and building automation products and services. The segment is the market leader in commercial HVAC and industrial refrigeration. The Power Solutions segment is the largest producer of lead-acid batteries in the world, selling 146 million lead-acid batteries in 2015, and is the lead-acid battery market leader with 36% market share.

Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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